Absurd ACCC’s destructive telco fantasy will only make things worse

The ACCC appears fixated on a potential industry landscape that doesn’t and probably won’t exist; a fantasy of its imagined perfect industry structure.

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TPG had plans to build a 4G wireless network, using small cell technology, but abandoned them last year after Scott Morrison, acting as Home Affairs minister, announced a ban on the use of Huawei technology in 5G networks on national security grounds.

Effectively barred from using the lowest-cost provider (from whom it had already ordered more than $100 million of equipment that was now unusable) and with a future upgrade path to 5G services cut off by the decision, TPG’s David Teoh decided to cut his losses and abandon the planned network build.

Thus, while at face value it might appear that the merger would reduce the number of wireless network operators from four to three, increasing concentration, the reality is that the fourth operator doesn’t exist.

The ACCC’s opinion is that if it blocks the merger it might, substituting its judgment for the commercial judgement of the TPG board and management.

It wouldn’t be the ACCC, of course, having to contemplate forking out the many billions of dollars required to be the very late starter in the scramble to build 5G networks.

The ACCC might wish for a different telecommunications landscape but that doesn’t mean it would emerge.

The commission says TPG has a commercial imperative and the capabilities to roll out its own mobile network and that the merger would preclude TPG’s entry, therefore substantially lessening competition.

The ACCC might wish for a different telecommunications landscape but that doesn’t mean it would emerge.

Even had it been built, the aborted TPG network wouldn’t have been a meaningful competitor to Telstra, Optus or Vodafone.

The budget for the build was only $600 million, which would have supported a few thousand small cell sites in the CBDs, not a national network. Telstra, Optus and Vodafone are spending billions each year just to upgrade their networks.

While TPG has been a disruptive, price-based competitor in fixed line services in the past, the amount of capital it would require to build a new national 5G wireless network, from scratch, that would provide direct and serious mass-market competition to the incumbents is probably well beyond its financial capacity. That’s why its original plan was so relatively modest.

It appeared TPG’s network strategy was designed to complement TPG’s fixed line strategies and offer some targeted competition to the national broadband network – or, the more cynical have said, to encourage overtures from Vodafone.

Without the merger TPG would be relegated to being a declining fixed line business, suffering an intensifying margin squeeze as the NBN roll out nears completion.

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While Vodafone would be cemented in as a poor (and unprofitable) third player behind Telstra and Optus in wireless, with a market share of less than 20 per cent against Telstra’s 44 per cent and Optus’ 29 per cent.

In words, if the ACCC view prevails, the two companies and competition might be diminished, not enhanced.

If combined, and TPP’s large fixed line customer base is brought next to Vodafone’s wireless customer base — within an entity with a far larger and stronger balance sheet than either company has today — they would be a much stronger force in the market. They would have scale, financial capacity and the ability to bundle products and services.

The delay caused by the ACCC’s stance does represent a real setback for Vodafone and TPG, given that Telstra and Optus are racing to layer 5G services over their existing 4G infrastructure.

Once 5G handsets are available from the major vendors, and regardless of whether 5G applications are initially compelling, they will render 4G networks increasingly anachronistic.

That is why blocking the merger on the basis of an inferior network that will never be built and a diminution in competition that wouldn’t have occurred is an absurdity.

The ACCC’s Rod Sims might like the telco landscape to be different but the decision won’t make it so, at least not in a way that facilitates greater competition. Indeed, competition in both fixed and wireless broadband is likely to be lessened relative to what it might have been if the ACCC stance holds.

It may not. It is almost inevitable that, despite the lengthy delays and costs, Vodafone and TPG will challenge the ACCC decision in the Federal Court, where the ACCC’s record on major cases isn’t impressive. They should.

Stephen is one of Australia’s most respected business journalists. He was most recently co-founder and associate editor of the Business Spectator website and an associate editor and senior columnist at The Australian.